Which Funds Can Be Tokenized On-Chain – And Why It Matters

In the ever-evolving world of finance, the fusion of traditional investment structures with blockchain technology is unlocking entirely new possibilities. Among these, fund tokenization has emerged as one of the most promising innovations—redefining how we perceive, access, and manage capital.

But while the term "tokenization" is becoming a buzzword, not every type of fund is equally suited for life on the blockchain.

So the question is: Which kinds of funds can realistically be tokenized—and why?

Let’s dive into the world of tokenized funds.

What Is Fund Tokenization?

Fund tokenization is the process of converting units of ownership in a fund—like shares or limited partnership interests—into digital tokens recorded on a blockchain. These tokens represent a fractional ownership stake and are transferable, programmable, and potentially tradable on secondary markets.

With this transformation, tokenized funds offer benefits like:

• ✅ Lower entry barriers – Investors can buy fractions of high-value assets.
• 🔄 Improved liquidity – Investors can exit positions more easily through peer-to-peer or platform-based trading.
• 🌐 Global accessibility – No geographical limits on who can invest.
• 📜 Transparent and immutable records – Blockchain provides a tamper-proof ledger.
• ⚙️ Smart contract automation – Automates dividends, redemptions, and compliance.

Funds That Can Be Tokenized (and Why)

Let’s look at the types of funds that are ripe for tokenization:

1. Private Equity Funds

Traditional Issues: Long lock-in periods, high capital requirements, and complex exit strategies.

Why Tokenize: By converting LP shares into tokens, private equity funds can offer greater liquidity and allow smaller investors to participate.

Use Case: Hamilton Lane partnered with Securitize to tokenize access to its private equity strategies, broadening investor reach.

2. Venture Capital Funds

Traditional Issues: Illiquidity, high-risk profiles, and closed investor groups.

Why Tokenize: Tokenization enables secondary market liquidity and fractional investments—empowering smaller players to back innovation.

Use Case: Blockchain-native VC funds like dao5 and MetaCartel Ventures issue tokenized LP shares that align incentives across the DAO community.

3. Real Estate Funds / REITs

Traditional Issues: Illiquid assets, large ticket sizes, and slow transactions.

Why Tokenize: Real estate tokenization allows fractional ownership of properties or REIT shares—turning $100 into a slice of a Manhattan building.

Use Case: Platforms like RealT and Brickken tokenize rental properties, distributing rental income as yield-bearing tokens.

4. Hedge Funds

Traditional Issues: High entry thresholds, lack of transparency, delayed NAV reporting.

Why Tokenize: Smart contracts can automate profit sharing and performance fees while allowing instant redemption via token burning.

Use Case: BlueBay Tokenized Credit Fund on Avalanche offers near-institutional fixed-income strategies in a tokenized wrapper.

5. Mutual Funds & ETFs

Traditional Issues: NAV-based pricing once a day, fees, and custodial layers.

Why Tokenize: Real-time pricing, 24/7 trading, and global distribution make tokenized mutual funds much more accessible and efficient.

Use Case: Franklin Templeton’s OnChain U.S. Government Money Fund runs on Stellar and Polygon, offering regulated exposure with on-chain investor caps.

6. Money Market Funds

Traditional Issues: Accessibility limited by traditional platforms and geography.

Why Tokenize: Enables programmable treasury operations, cross-border payments, and stable yield strategies for DAOs and Web3 treasuries.

Use Case: Circle’s USDC Treasury and BlackRock’s experiments with tokenized short-term treasuries are early examples.

Funds That Face Challenges in Tokenization

While the benefits of tokenization are clear, some fund types aren’t ideal candidates—at least, not yet.

❌ Pension Funds

• Governed by strict fiduciary duties and regulatory restrictions.
• Their long-term focus and defined contribution structures make real-time liquidity less relevant.

❌ Sovereign Wealth Funds

• Controlled by governments with strategic geopolitical goals.
• Tokenization may pose transparency and control risks that conflict with their mandates.

❌ Endowment Funds

• Often have conservative investment policies and low turnover.
• Tokenizing their assets may offer limited utility or violate trust mandates.

Key Factors Enabling Tokenization

What makes a fund tokenizable? Here are the enablers:

1. Clear ownership structure – Simple LP/GP frameworks work well on-chain.
2. Digitizable assets – Real estate, equity, debt, or public securities.
3. Regulatory compliance frameworks – Like ERC-3643, which enables identity-verified transfer of security tokens.
4. Liquidity demand – The more investors want out early, the more valuable tokenization becomes.
5. Compatible custodians and fund administrators – Needed for NAV tracking and regulatory reporting.

Why It Matters: The Big Picture

The tokenization of funds isn’t just about technical innovation. It’s about solving long-standing problems in the asset management industry:

• Reducing friction and fees.
• Opening up investment opportunities to a global population.
• Enabling instant cross-border capital formation.
• Giving more control to investors through programmable finance.

According to Boston Consulting Group, asset tokenization could unlock a $16 trillion market by 2030.

The future of finance is programmable, permissionless, and borderless—and tokenized funds are at the heart of this revolution.

While not all funds can (or should) be tokenized, private funds, alternatives, and liquid public strategies are already leading the charge. As regulation evolves and more infrastructure players enter the market, expect to see fund tokenization become the standard, not the exception.

If you're building or investing in tomorrow's financial ecosystem, keep your eyes on-chain.

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